Stock Talk - Stock Market Insights: Most Hated Bull Market Ever?

Starting point is 00:00:00 Investors, almost every year the S&P 500 has gained the last 14 years, I recall hearing from many in the financial media that this is the most hated bull market ever. Every year until now, I've disagreed with these calls. Until now, why? Well, those of you have grown to know our team over the last six years of growth at O'Carvis should have come to known, we like to stick to the data if we can. Folks, the data says, yes, this is probably one of the most hated bull markets I've seen the last 40 years. First off, think back to the Dumer calls in late 2022 and late 2023. What do you remember?

Starting point is 00:00:36 Well, what I remember is I recall in the second half of 2022, it was a call for continued rampant inflation. In fact, the Dumers were calling it hyperinflation, like Germany and post-World War II. To crater the U.S. economy and the stock markets, even beyond the notable recession and stock market sell-off, investors were put through, the first half of 2022. Wait a second, Chris. Hold on a second. Did you say recession in 2022? Yep, I did. Just like I did back then. Come on, we didn't have a recession, people said. Chris, the NBER never declared a recession, you might argue. Okay, true, I give you that. But as we've discussed for the better part of six years, waiting around for lagging, inaccurate, and falsely precise government data is not the way to run your investment portfolio. Or if you're a macro trader,

Starting point is 00:01:25 trade profitably. If you want to wade through the increasingly nebulous NBR definition, I'll drop a link in the description below. The short version summary is that their definition has somehow morphed into some nebulous, hand-waving, academic and political exercise, in my opinion. I'm going to quote a little bit of what they say in one sentence. The NBER's definition emphasizes that a recession involves a significant decline in economic activity that is spread across the economy and lasts for more than a few months. In our interpretation of the definition, we treat three criteria, depth, diffusion, and duration as interchangeable. What does that mean? I have no idea. When learning the money management business, I was taught a rather precise and narrow definition of a recession. What was that?

Starting point is 00:02:13 The markets seem to stick with more than the academics at NBER. This is what it was. Two consecutive quarters of negative real GDP growth. That's it. That's the one thing. Call it a recession. investors, we are concerned about what this means for stocks and our investments. Historically speaking, recessions have led to an average real decline in stocks of minus 30 to minus 35 percent. With the average recession return, I've seen quoted being around minus 32%. So thinking back, what happened to the economy in the first half of 2022? As measured by real GDP, the U.S. economy shrank by minus 1.6 percent in the first quarter of 2022 and minus 0.9%. percent in the second quarter of 2022. As I said back then, that's a recession. Of course,

Starting point is 00:03:01 those politicians in D.C. running the White House at the time reverently disagreed with this assessment, including Treasury Secretary Janet Yellen. She noted in several TV appearances, while two consecutive quarters of negative growth is generally considered a recession, conditions in our economy are unique. Her quote back then was, when you're creating almost 400,000 jobs a month, which is not a recession. What was going on at this time? Yep, the midterm elections were approaching in 2022 and the White House was very aware of the optics of the country in a recession, where Americas are struggling financially. Back then, the cost of so many things was skyrocketing and

Starting point is 00:03:42 inflation was running at multi-decade highs, many Americans were already taking it on the chin. There was no way they were going to admit to penciling in a recession in 2022 in front of the midterm elections. So why do investors care about the opinions of politicians and public servants? Or should they care about earnings, earnings growth rates, and interest rates? Well, investors, you should know the answer to that one if you've been investing for more than a few years. Take a look at this great chart of quarterly earnings of the S&P 500 in 2022 through the first quarter of 2024. From earnings insight, one can see earnings fell quarter to quarter from the second quarter of 2022 through the fourth quarter of 2022 and even declined year to year from the first quarter of

Starting point is 00:04:27 2022 into the first quarter of 2023. The economy shrunk in the first half of 2022 on a real GDP basis and earnings growth on the S&P went from positive 15% to start the year to almost minus 10% year over year to end the year in 2022. And guess what? Guess what happened to the overall S&P 500 during that period? Yep, you guessed it. It declined hard. Take a look at the 10-year chart of the S&P 500 during the ongoing secular bull market,

Starting point is 00:04:57 up and to the right in a channel. I went ahead and I stripped out the overshoot in late 2021 and the undershoot during the COVID crash, but this is a secular trend so far. Up and to the right, a bull market. As you can see, during the short recession in the first half of 2022, the S&P 500 declined peak to trough about minus 27 and a half percent in nominal terms. And when you throw in inflation running five to nine percent back then in the first half of 2022, your purchasing power or real return, your real loss with inflation calculating in there

Starting point is 00:05:31 was between minus 32 and a half and minus 37 and a half percent. Guess what? Those are recession number declines. The markets are smart. Of course, as they were at the lows when Dumers were at the lows, when Dumer's were at, out in mass calling for more down and crashes, which didn't happen in retrospect. What happened? The market's turned around. Many investors who panicked out of the markets back then have not gotten back in yet because, one, shorter term interest rates have risen and they

Starting point is 00:05:58 feel fine with their money making about 5% relatively risk-free in short-term treasuries. This is the cash on the sidelines argument many bold strategists make. Take a look at the chart from Bank America's securities on money market fund holding. They're over $6 trillion in counting. That doesn't scream rampant speculation to me. For the better half of 2003 and the first half of 2024, the drumbeat by stock market naysayers was it was only a few stocks driving the markets higher, which was factually correct given the way the S&P 500 is weighted,

Starting point is 00:06:34 and that was actually being used to discourage those who sold during the COVID, or near the lows in October of 2022, or October 2023, from getting back in. Investors, it was true at the time. It was true that a few stocks were helping the market more than anything else. Of course, the S&P 500 gained about 45% into tax week this year and 55% from the October 22 low. Just because these gains were mainly driven by seven stocks pushing the S&P 500 higher, does that mean that return doesn't count? Does that mean you got to give back the money? I don't think so. And what about since then? Now that breadth then the S&P 500 is expanding, and the other 495 S&P 500 stocks are starting to contribute to the market's gain.

Starting point is 00:07:20 According to Savita's Submarion of Bank America Securities, the other 493 companies in the S&P 500 index X the Magnificent 7 are set to show their second consecutive quarter of earnings growth since their earnings peaked when in early 2022. Earnings growth, lower trending or stable interest rates, those are usually things that lead to higher stock prices. No excuses necessary. Finally, a third reason I've heard for not investing or staying out of the markets and missing the gains over the last two to three years are largely those surrounding emotions tied to political preferences. I've heard I'm waiting on the election numerous times from investors with both party affiliations. I've heard I'm expecting volatility and I'm waiting for that to dissipate. I haven't heard the conclusion yet, though, as if they'll get back in the market if one party wins the election in November or sell every. thing if their candidate loses in the next few weeks. I remind investors that we had recessions and down markets under both Bush in 2000 and Obama in 2008, to be followed by almost 80% gains during Trump's first three and a half years as president, as well as the near exact same 80% gain under Biden Election Day through mid-year this year. If that data doesn't convince

Starting point is 00:08:36 you that it's the Fed and the economy, not the president who influences your investment returns, How about some more data that's from behind the scenes? Let's go back and look at the true measures of volatility then. Both realize volatility, which is the squiggly line that stocks make on a daily basis when you turn on your TV, or implied volatility, which is the math built into the options market used to hedge or speculate on futures moves. I've noted the same thing since the year started. What's that? It's almost everyone is already nervous and hedged with the same time frame in mind. They've all been that way all year.

Starting point is 00:09:12 Take a look at the chart of the relative moves in Realized Volatility, that's R-VAL, and Ford Volatility Futures, continuous contract, for about a week out, right in front of the presidential election. That's around October expiration, the 16th of this month. As one can see, realized volatility has increased since the beginning of the year by about 25% in total, but it's been declining since the midsummer spike. On the other hand, the continuous contract for October expiration, that's UxV4, has been nearly the identical price throughout the year. As of this writing, it's priced around 19 and a quarter, and it's been there throughout the year. Anytime it's risen to close to 21 to 22, sellers of volatility have come out, and buyers of the S&P 500 just showed up.

Starting point is 00:09:59 It happened on early in the year in the first quarter pullback, again during the April decline, and in a big way, during the yen-carry-term. panic in early August. Will it happen again and the buyers will come in and buy the dip on any political panic or third quarter earnings weakness in the overall market in the coming few weeks? Our indicators continue to say yes. It won't be different this time. And regardless of what you've heard on TV since late 2022 and again in 2003, it's still a bull market until it proves itself it isn't. In my opinion, it's still one of the most hated bull markets I've seen in doing this for investors for 35 years. If you're uncomfortable with a wider range of possible equity outcomes, the Oak Harvest team has launched a new strategy that retains the ability to go long stocks,

Starting point is 00:10:45 short stocks, as well as buy partial hedges and shock absorbers for a stock portfolio. You can find information on this new strategy of ours at oak harvestfunds.com. From the whole team here at Oak Harvest, thank you and have a great weekend. All content contained with an Oak Harvest podcast expresses the views of the speaker and is for informational purposes only. It is based on information believed to be reliable when created, but any cited data, indicators, statistics, or other sources are not guaranteed. The views and opinions expressed herein may change without notice. Strategies and ideas discussed may not be right for you, and nothing in this podcast should be considered as personalized investment, tax or

Starting point is 00:11:28 legal advice, or an offer or solicitation to buy or sell securities. Indexes such as the the S&P 500 are not available for direct investment and your investment results may differ when compared to an index. Specific portfolio actions or strategies discussed will not apply to all client portfolios. Investing involves the risk of loss and past performance is not indicative of future results.

Stock Talk - Stock Market Insights: Most Hated Bull Market Ever?

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